Howard Dean

Costs budget exaggeration is misconduct

In a scathing judgment, the court found that the “incurred costs” claimed within the claimant’s budget breached the indemnity principle resulting in the disallowance of all costs management costs.

The circumstances

The claimant suffered a stroke and pursued a claim for damages for failure to treat the chest pains that he experienced in 2011. He instructed Irwin Mitchell solicitors in 2012 and proceedings were issued in November 2013.

During the claim, two costs budgets were served in the claimant’s name and certified by partners of Irwin Mitchell as being “accurate and fair.” Upon conclusion of the claim, the defendant noticed that the pre-action “incurred” costs claimed within the bill were lower than those claimed within the budgets; and both budgets stated different figures for the same phase.

Upon further scrutiny, the difference in amount was due to ‘blended’ hourly rates being used in the budget whereas the actual retainer hourly rates were used in the bill as set out in the table below:

The difference in hourly rates meant that the amount of “incurred” pre-action costs was significantly lower in the bill than in either of the budgets. This gave the initial appearance when adding the incurred and estimated costs together that the total costs for each phase were much more in line with the total of the approved budget for each phase.

Upon the instructions of NHS Resolution, objection was raised in the detailed assessment and an application was issued for costs to be disallowed on the basis of misconduct. The defendant argued that claiming incurred pre-action costs at an amount that exceeds the actual amount of costs is improper conduct. It is a breach of the indemnity principle and results in the certificate to the statement of truth being inaccurate and mis-leading.

Irwin Mitchell argued that the costs budget is drafted using hourly rates by grade of fee earner that are ‘blended’ rates reflecting a fee earner’s original, current and future hourly rates. Consequently, Irwin Mitchell use a blended rate albeit it is higher than the rate actually charged to the client at the time the budget is prepared.

Irwin Mitchell rejected the suggestion that it had acted improperly saying that they had used ’composite’ or ’blended’ hourly rates in their costs budgets since April 2013 to cater for the fact that their retainers contain a provision for an increase in hourly rates during the life of the claim.

Judgment

In a scathing judgment Master Rowley expressed his disapproval of the ‘blended hourly rate’ approach to costs budgeting that was used, saying:

“It is self-evident that a solicitor preparing a costs budget should not overstate a party’s liability to his solicitor for costs that have already been incurred. It is to all intents and purposes a breach of the indemnity principle.

It is bound to mislead both the opponent and the court in circumstances where neither has any opportunity to examine the costs claimed in any detail at a budgeting hearing. It is no answer to say that the opponent’s liability to pay such costs is ultimately protected by the option of going to a detailed assessment.

The whole purpose of costs management is meant to limit the need for detailed assessments and part of that must involve the parties and the court being able to rely upon the information provided by the other party.”

Master Rowley went on to say that in his judgment, the Irwin Mitchell approach to costs budgeting is not one which would be endorsed by solicitors in general and as such he was satisfied it amounted to improper conduct.

In imposing sanction for this unacceptable conduct, the Master stated:

“It seems to me that the egregious aspect of the conduct here relates solely to the approach to the costs management of the underlying claim. Consequently, it is the costs claimed in the costs management activities that should be penalised.

I have concluded that, in order sufficiently to mark the court’s disapprobation of Irwin Mitchell’s conduct in this case, I should disallow all of the costs management elements, or “non-phase” part, of the bill.”

Keoghs comment

Keoghs acted upon the instructions of NHS Resolution to challenge this improper conduct to a fully contested hearing.

In claiming “incurred” costs in excess of those actually incurred a party is in breach of the indemnity principle and will attract censure from the court.

This exaggeration relies upon the fact that it is not the role of the court to fix or approve the hourly rates and the court does not have the power to reduce the incurred costs in costs management.

This means that the “difference” between the actual incurred costs and those stated within the budget goes undiscovered and as in this case provided Irwin Mitchell with a larger “pot” of costs to be incurred going forwards than either the court or the defendant intended.

The benefit of this ‘blended’ hourly rate approach to costs budgeting becomes clear upon settlement of a claim. The “pot” of costs increases the likelihood that the costs claimed in the bill will be less than the total of the budget that has been approved. Where this happens, the protection from assessment afforded by CPR 3.18 is triggered. The defendant is then required to show “good reason” to depart from the budget before the court may conduct a more traditional assessment of the costs claimed.

Where the court is not satisfied there is good reason, the defendant may be ordered to pay the costs as claimed within the bill without assessment as CPR 3.18 is designed to reduce the scope of, and need for, detailed assessment.

This approach to costs budgeting appears to have been used by Irwin Mitchell since the costs budgeting regime was implemented. As a result, it is likely that there will be many more cases where certified costs budgets will be in breach of the indemnity principle and subject to similar sanction.

This case has been referenced at page 95 by Lord Justice Jackson in his report published on 31 July 2017, “Review of Civil Litigation Costs: Supplemental Report on Fixed Recoverable Costs.”

NHS Resolution will continue to challenge such improper conduct as and when it arises.